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Economy | Taxes & Tariffs

FIRS Directs Companies Operating Within Free Trade Zones To File Income Tax Returns

Apr 19, 2021   •   by   •   Source: Proshare   •   eye-icon 936 views

Monday,April 19, 2021 / 02:00PM / By Banwo & Ighodalo / Header Image Credit:HDFC Life

 

Summary

On April 15, 2021, the Federal Inland Revenue Service ("FIRS") issued a public notice (the "Notice") by which it directed all approved enterprises operating withinNigeria's Export Processing and Oil & Gas Free Zones (the "Free Zones") to: (i) file income taxreturns for 2021 and subsequent years of assessment; and (ii) compute incometax and pay the tax due, if any.

 

The returns are required to be filed in the manner and time specifiedin the Companies Income Tax Act ("CITA").The Notice was issued pursuant to the provisions of sections 58 and 59 of theFinance Act 2020 (the "Finance Act"),which amended section 18(1) of the Nigeria Export Processing Zones AuthorityAct ("NEPZA Act") and the correspondingsection 18(1) of the Oil and Gas Export Free Zone Act ("OGEFZA Act"); and by so doing now subjects Free Zone operators tothe provisions of section 55(1) of the CITA, which imposes an obligation tofile returns and provisional accounts. Failure to comply with the statutoryobligation to file returns attracts penalties prescribed in the CITA and theFederal Inland Revenue Service (Establishment) Act 2007 ("FIRS Act"). 

 

Certain FIRS tax offices listed below, are designated in the Notice forthe purpose of returns filing compliance by Free Zone operators:

 

  • Enterprises operating in the South-South region are to file returns with the Port Harcourt, Medium Tax Office ("MTO");
  • Enterprises operating in the South-East region are to file returns with the Enugu, MTO;
  • Enterprises operating in the South-West region are to file returns with the Ibadan, MTO;
  • Enterprises operating in the North-East and North-West regions are to file returns with the Kano, MTO;
  • Enterprises operating in Lagos State are to file returns with the Lagos Island, MTO; and
  • Enterprises operating in the North-Central region and the Federal Capital Territory, Abuja are to file returns with the Abuja MTO.

 

Commentary

Free Zones designated by order of the President, upon therecommendation of the Nigeria Export Processing Zones Authority ("NEPZA"), pursuant to the provisions ofthe NEPZA Act, and those so designated by the President, and operating in theOil and Gas Export Free Zones, and subject to the supervision and control ofthe Oil and Gas Export Free Zone Authority ("OGEFZA"), enjoy several tax and other related incentives.

 

For example, pursuant to section 8 of the OGEFZA Act and paragraph 5(1)of the Oil and Gas Export Free Zone Regulations 2019 (the "OGEFZA Regulations"), approvedenterprises operating within Free Zones in the oil and gas industry are exemptfrom all federal, state, and local government taxes, levies, rates, and dutiesin connection with operations carried on within such Free Zones.

 

Further, paragraph 5(2) of the OGEFZA Regulations provide that alicensee within Free Zones in the oil and gas sector shall be exempt fromproviding, filing or submitting any documents or information (which would havebeen required of them but for the application of the OGEFZA Regulations), forthe purpose of assessing or charging taxes, levies, rates, or duties. Inaddition, section 18(1)(d) and (f) of the OGEFZA Act provide that approvedenterprises licensed to carry on business within Free Zones in the oil and gassector shall be entitled to several incentives, including exemption fromproviding import or export licences and entitlement to rent-free land atconstruction stage. Specifically, Regulation 6(1) of the OGEFZA Regulationsprovide that licensees shall be entitled to exemption from: (i) federal, state,and local government taxes, levies, and rates; (ii) regulations pertaining totaxes, levies, duties, and foreign exchange; (iii) customs duties andassociated fees; and (iv) Value Added Tax ("VAT")on all imported products in relation to approved activities, including VAT onsite construction activities and on locally produced materials, equipment, andservices.

 

To ensure transparency and monitor the activities of operators withinFree Zones, sections 58 and 59 of the Finance Act, which amended sections18(1)(a) of both the NEPZA Act and the OGEFZA Act (which defined and preservedthe tax exemption regime) provide, and now require all companies registered andoperating within Free Zones to comply with the provisions of section 55(1) ofthe CITA and render returns to the FIRS in the prescribed manner and, in theevent of default, be exposed to the noncompliance penalties prescribed in boththe CITA and the FIRS Act.

 

Even though, the provisions of the Finance Act safeguard the taxexemption status of Free Zone enterprises, they are now required and obligatedto file tax returns.

 

In our view, the Notice is an administrative instrument by which theFIRS seeks to give life to the new tax obligation now imposed on Free Zoneenterprises. Further, we note that the amendments to the OGEFZA Act and theNEPZA Act under the Finance Act, have now aligned Free Zones with section 55(1)of the CITA; which already covers "every company,including a company granted exemption from incorporation, whether or not acompany is liable to pay tax under the Act". It has also aligned Free Zoneoperators with the provisions of part 6 of NEPZA's InvestmentProcedures, Regulations and Operational Guidelines for Free Zones in Nigeria2004 ("NEPZA Regulations"),which oblige companies registered and operating within Free Zones to remittaxes for transactions within the customs territory, and also file tax returnswith the FIRS in that regard. Similarly, paragraph 15(a) of part 2 of the NEPZARegulations provide that goods released into the customs territory shall beclassified as imports and shall be subject to all applicable taxes, duties, andlevies.

 

The development and new dispensation aligns with the decision of theTax Appeal Tribunal ("AT") in thecelebrated case of NigerdockNigeria Plc FZE v FIRS, where the appellant, a Free Zone operatorapproved by the NEPZA, provided services to non-approved enterprises outside ofthe Free Zone for a period of five (5) years, and the FIRS subsequently raisedassessment on the appellant's income earned from services provided outside theFree Zone. The appellant's objection to the assessment eventually went to theTAT for determination. The TAT held that the tax exemption provided undersections 8 and 18(1) of the NEPZA Act only applied and was available to a FreeZone operator, where its operations are exclusively executed within theconfines of the Free Zone. It further held that if the Free Zone operatorcarries on fee-earning activities outside the Free Zone, it would be liable topay taxes applicable to such activities outside the Free Zone.

 

In our view, the amendments introduced under the Finance Act to theOGEFZA Act and the NEPZA Act, seek to maintain the sanctity of Free Zones byputting measures in place to ensure that the objectives of creating Free Zonesare actualized. This prevents Free Zone operators from abusing the taxexemption regime granted under the statutes. We reasonably believe that therequirement for Free Zone operators to file tax returns, henceforth, willenable the FIRS effectively monitor the activities of Free Zone operators forthe purpose of ascertaining their tax liability in respect of transactions doneoutside the Free Zones.

 

 

The Grey Matter Concept is aninitiative of the law firm, Banwo & Ighodalo.

 

DISCLAIMER: This article is only intended to provide generalinformation on the subject matter and does not by itself create a client/attorneyrelationship between readers and our Law Firm or serve as legal advice. We areavailable to provide specific advice on the subject of this Alert, as may berequired.

 

Enquiriescan be sent to [email protected]



 Proshare Nigeria Pvt. Ltd.


 

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